₹ TaxSetu 2025
Capital Gains — Mutual Funds

Mutual Fund Taxation in FY 2026-27: LTCG, STCG, SIP & Dividend Rules

Equity funds: 20% STCG (≤12 months), 12.5% LTCG above ₹1.25L/year. Debt funds: everything at slab rate. SIP redemptions use FIFO. Budget 2026 changed nothing — full tables below.

Tax rates at a glance (FY 2026-27)

Fund typeShort-termLong-term
Equity funds (65%+ equity, incl. arbitrage & ELSS)≤12 months: 20%>12 months: 12.5% above ₹1.25L/yr
Debt funds bought on/after 1-Apr-2023Slab rate always (deemed STCG — no LTCG benefit)
Hybrid 35–65% equitySlab rate>24 months: 12.5%, no indexation
Gold / FoF / international (post-Apr-2023 units)Slab rate always
Dividends (IDCW option)Added to income, taxed at slab rate (+TDS above threshold)

The ₹1.25 lakh equity exemption — with example

Listed-equity LTCG (shares + equity MFs combined) up to ₹1.25 lakh per year is fully exempt. Only the excess pays 12.5%.

Example — ₹2 lakh equity LTCG in one year
Meera redeems equity funds with ₹2,00,000 long-term gains. Exempt: ₹1,25,000. Taxable: ₹75,000 × 12.5% = ₹9,375 + 4% cess = ₹9,750 total. Effective rate under 5%.
Equity STCG (20%) and crypto gains are special-rate income that never gets the 87A/156 rebate — even if your total income is under ₹12L, this slice still pays tax. Full capital-gains guide →

How SIP withdrawals are taxed (FIFO)

Each SIP instalment is a separate purchase. On partial redemption, oldest units go first (FIFO) — so a 3-year-old SIP's early units are usually long-term while recent ones are short-term. Your fund statement / capital-gains report already splits this for your ITR.

ELSS, lock-in and old-vs-new regime

ELSS has a 3-year lock-in per instalment and equity taxation (12.5% above ₹1.25L). Its 80C deduction (₹1.5L) works only in the old regime — in the new regime ELSS is just another equity fund with a lock-in, so compare with flexi-caps before investing. All deductions → · Which regime? →

Our take ✍️
The SIP taxation myth that refuses to die: each SIP installment has its OWN 12-month clock. Your 3-year-old SIP isn't 'all long-term' — last month's installment is short-term. Redeem oldest-first (FIFO does this automatically) and harvest ₹1.25L gains yearly.
⚖️ Legal footing: the 65% test + debt-fund slab rule
'Equity-oriented' = 65%+ in equity — pass and you get 20%/12.5% + ₹1.25L LTCG cushion; fail and it's debt treatment. Since 1-Apr-2023, debt-fund gains are taxed at slab rate regardless of holding (indexation era over). Each SIP installment carries its own 12-month clock; redemptions follow FIFO. Harvest ₹1.25L of LTCG every March — the exemption doesn't carry forward, so use-it-or-lose-it yearly.

By TaxSetu Editorial Team · Last reviewed: 7 October 2026

Based on the Income-tax Act 2025, Income Tax Rules 2026 and CBDT notifications; sections per the Income-tax Act 1961 (as amended) with 2025-Act mappings where notified · Verify on the official portal: incometax.gov.in

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Frequently Asked Questions

12.5% on gains above ₹1.25 lakh per financial year, for units held over 12 months. The first ₹1.25L of equity LTCG (shares + MFs combined) is exempt.

Each SIP instalment is a separate purchase and FIFO applies — oldest units redeem first. Early units of an old SIP are usually long-term; recent ones short-term.

Units bought on/after 1-Apr-2023 are taxed at your slab rate no matter how long you hold — there is no LTCG benefit. Only older units keep concessional treatment.

ELSS keeps equity taxation but its 80C deduction works only in the old regime — in the new regime it is just an equity fund with a 3-year lock-in.